Mug’s game – but it’s nice when you win

It sounds like such easy money – go to a yearling sale, select a nice type and picture yourself in the winner’s circle next to your trainer
Bart Cummings
.

As the Melbourne Cup fast approaches, it’s hard not to dwell on some of the race’s more famous winners. With her three back to back cup victories – not to mention countless other wins – super mare Makybe Diva won her owner, South Australian tuna fisherman Tony Santic, a total of $14.5 million before he retired her at Flemington to mark her third Melbourne Cup victory in 2005.

Even the mighty Phar Lap came home to the tune of £56,425 from wins in Australia plus $US50,000 in the US, (a relative fortune in his day) before his untimely, painful death in April 1932. And at the tender age of four, superstar and hot cup favourite for Tuesday, So You Think, has so far bagged $4.6 million for Malaysian property tycoon Dato Tan Chin Nam.

But if you find yourself thinking big when it comes to horseflesh and jockey silks, you might want to think again.

In the nation’s two biggest racing states, the prizemoney is a mouthwatering $136.8 million in NSW and $141.5 million in Victoria. But what are the realistic chances of you ever banking a serious slice of that money? What sort of costs are you up for with horse ownership? And does it provide any serious tax breaks?

As the second biggest thoroughbred nursery, behind the United States, about 23,000 racehorses are born in Australia each year, providing plenty of cannon fodder. But only 40 per cent of horses that actually make it to the races win a race, according to figures from Racing NSW. It gets worse: of those that do win, 70 per cent fail to win more than $10,000.

And only 45 per cent of owners’ costs are returned through prizemoney or other returns. All of which paints a dismal picture and suggests a lot of owners are left standing at the finishing post, very much out of pocket. Not least when you consider it costs about $30,000 a year to have a horse trained in a capital city, where trainer’s fees can hit up to $160 a day.

An executive director of Macquarie Group, Laurie Macri, says that thinking of a racehorse as an asset is something of a folly. “The industry theoretically runs at a loss," he explains.

Related Quotes

Company Profile

“So you have to work within that premise. You have to accept that the intangibles – the fun and excitement of racing horses with your family and mates – need to make up for the financial losses."

Sure, you can remove some of the risk by employing the best bloodstock agents, trainers and jockeys. But again, Macri points out that racing is not a stock standard business model.

“You can plan for success, but in racing horses you have no control. It’s not like any other business. You can set your racing enterprise up so you would expect to make money according to a normal business plan – but you don’t necessarily get what you deserve in racing."

It might be a mug’s game, but Macri has had more success than most. He has shares in about 20 horses. Past top horses include the mare Virage de Fortune, which won more than $1 million before being sold for $3.4 million in 2007. Not a bad return on a horse that cost $70,000 as a yearling.

In 2008, Macri and his mate, former Photon boss Tim Hughes, received $5 million from the powerful Dubai-owned Darley Stud for a share in superstar colt Von Costa de Hero.

Respected Melbourne-based bloodstock tax adviser Paul Carrazzo, principal of Carrazzo Consulting, also has plenty of tips for new players – including the fact that, in accordance with Australian Taxation Office rules, hobbyists don’t pay capital gains tax when selling a horse or a share in a horse that cost $10,000 or less.

The bad news for hobby buyers at the upper end of the market over $10,000 – where the yearling record for Australasia is $3 million – is that capital losses cannot be claimed on the sale of racehorses.

However, “non-horse" capital losses can be used to offset and reduce any gains resulting from the sale of a horse.

“For example, a capital loss on the sale of a rental property can be used to offset the gain on the sale of a racehorse," Carrazzo says.

One of the biggest blows to the perceived glamour of horse ownership came in 2009 when budget changes to non-commercial loss rules deemed it harder for high-income earners – those on adjusted taxable income of over $250,000 – to claim loss deductions from their tax businesses.

“Put it this way: I’d only put into horses as much as I could afford to lose. But there are a lot of opportunities in this industry to make money if you do it right," Carrazzo says.

“Doing it right" entails “continually researching sales results; being active and present at horse sales; and using the proper bloodstock consultants, because it’s such a volatile industry and very much linked to the fashion of the moment," says Carrazzo.

Laurence Eales, owner of the 2009 Melbourne Cup winner Shocking, is one example of getting into horses the savvy way, punting on the then little-known stallion Street Cry a few years ago, and buying up big on his progeny, Shocking, for a relative song.

“He knew horses – but I’m sure he had some good help," says Carrazzo.

“You generally find the big players – the Coolmores and Darleys – have top consultants in the background.

“Look back to the days of Lord Derby and the Aga Khan and both had eminent consultants in the background – you need more than wealth."

Carrazzo concedes the sharemarket is a safer bet. “But if you want a bit of sizzle with your sausage and a bit of entertainment, then I’d invest some of your portfolio into the horse industry, as there’s nothing like the ecstasy of winning – and the potential upsides are way ahead of most asset classes," he says.

Like Macri, Carrazzo knows first-hand the highs and lows of racing; he has shares in five horses. Have any champions passed through his hands? “Ah – no," Carrazzo admits. “But I’ve got a promising horse right now called Last Cash – he looks like he’ll at least pay his way."